The banking and financial crisis in the UK: what is real and what is behavioural?

Purpose - The purpose of this paper is to reflect on the recent banking and financial crisis in the UK. It discusses the triggers of the crisis from a UK perspective and then examines the immediate reactions in the form of short-term policies and concludes with a discussion on longer-term policies. Design/methodology/approach - This is a conceptual paper that argues that some of the triggers of the crisis are real and some are behavioural. Findings - The crisis has its roots in the sub-prime crisis of the USA with spillover effects for the UK due to its well-developed and international financial sector. The systemic environment of high leverage in the financial, corporate and household sectors, the international nature of finance, and the opacity in banks' balance sheets are real triggers. In contrast, the underestimation of risks by almost all agents in the economy is behavioural. Practical implications - The paper argues that some of the conditions that led to the crisis will not change and should now be incorporated in new banking regulations. This is particularly true in the case of behavioural factors. Optimism, greed, herding and underestimation of low-probability high- impact events, are all parts of human nature. Human nature will not change. Thus, it need better regulations. Social implications - Less privileged groups, such as the poor, the uneducated, and the elderly, need better regulation to make them less vulnerable not only to others' biases but also to their own biases. Originality/value - The paper is original in discussing behavioural side of the crisis along with the real side of it.